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European Commission

MEMO

Brussels, 4 June 2014

Guidelines on Transfer Pricing – Frequently Asked Questions

What is transfer pricing?

Transfer pricing refers to the terms and conditions surrounding transactions taking place within a multi-national company. It concerns the prices charged between associated enterprises established in different countries for their inter-company transactions, i.e. transfer of goods and services. Since the prices are set by associates within the multi-national company, it may be that the prices do not reflect an independent market price. This is a major concern for tax authorities who worry that multi-national entities may set transfer prices on cross-border transactions to reduce taxable profits in their jurisdiction. This has led to the rise of transfer pricing regulations and enforcement, making transfer pricing a major tax compliance issue. The approach adopted by EU Member States to evaluate the price of inter-company transactions is that of the arm's length principle. The arm's length principle requires that the prices used in inter-company transactions should correspond to the prices that would have applied between independent enterprises for the same transactions (market price).

Are there any practical difficulties in the application of the arm's length principle?

The interpretation and application of the arm's length principle in EU Member States varies – from one tax administration to another and between tax administrations and business. This can result in uncertainty, increased costs and administrative burdens and lead to potential double taxation or double non-taxation. These aspects impact negatively on the smooth functioning of the Internal Market.

What is the EU Joint Transfer Pricing Forum (JTPF)?

The Commission set up the JTPF in 2002 to examine issues which constitute obstacles to cross-border business activities and to find pragmatic solutions to problems arising from the application of the arm's length principle within the EU. The JTPF has been an important resource for the work of the Commission on improving transfer pricing practices across the EU. The JTPF is composed of experts from the national tax administrations of the 28 Member States and representatives of non-government stakeholders appointed in response to an open call for applications.

What are secondary adjustments?

Secondary adjustments are transfer pricing adjustments made in some cases by tax authorities to reconcile the financial situation of an enterprise following an initial (primary) transfer pricing adjustment – that is, an adjustment made by the taxpayer in its tax return to bring the price of an inter-company transaction in line with the market price.

What are the guidelines on secondary adjustments about?

The guidelines on secondary adjustments are addressed to Member States and contain recommendations on how to avoid double taxation and to resolve disputes related to secondary adjustments. Where secondary adjustments are not compulsory it is recommended not to impose them in order to avoid double taxation. Where secondary adjustments are compulsory, means to relieve double taxation should be provided.

What are compensating adjustments?

Compensating adjustments are transfer pricing adjustments used by taxpayers to report transfer prices for tax purposes. Compensating adjustments are a tool for taxpayers to report to tax authorities a transfer price for an inter-company transaction that is a market price, even though this reported price differs from the amount actually charged within the company.

What do the guidelines on compensating adjustments recommend?

Member States have different practices with respect to compensating adjustments. The report provides practical guidance on avoiding double taxation and double non-taxation in the application of these adjustments in spite of the different practices of Member States. In particular it recommends that Member States should accept a compensating adjustment initiated by the taxpayer for the purpose of filing the tax return, if the taxpayer has fulfilled a set of conditions, which include for example the requirement that the profits of the concerned related enterprises are calculated symmetrically, i.e. enterprises participating in a transaction report the same price for the respective transaction in each of the Member States involved.

What are the ongoing projects the EU Joint Transfer Pricing Forum?

Currently, JTPF is monitoring the practical functioning of Convention 90/436/EEC on the elimination of double taxation in connection with the adjustment of profits of associated enterprises1 (Arbitration Convention) and the revised Code of Conduct for the effective implementation of the Arbitration Convention2, as well as the Code of Conduct on transfer pricing documentation for associated enterprises in the EU (EU TPD)3.

What subjects will the EU Joint Transfer Pricing Forum discuss in the future?

In the coming months the JTPF will complete its work on the monitoring of the practical functioning of the Arbitration Convention and the revised Code of Conduct for the effective implementation of the Arbitration Convention. It may also propose possible improvements to the Code of Conduct on transfer pricing documentation for associated enterprises in the EU.

How practical are the guidelines on managing transfer pricing risk?

The guidelines on managing transfer pricing risk are based on the general principles of cooperation between taxpayer and tax administration(s), identification of high and low risk areas as well as well-targeted, timely and appropriate actions. Best practices are identified for each of the three possible phases of examining a transfer pricing file – pre-audit, audit and dispute resolution.They are extremely concrete; they contain an example of a detailed work plan for a transfer pricing audit. For example, Member States are advised to carry out simultaneous audits of both sides of a transfer pricing case as authorized under the Administrative Cooperation Directive.

1 :

 OJ L 225, 20.8.1990, p.10.

2 :

OJ C 322, 30.12.2009, p.1.

3 :

OJ C 176, 26.07.2006, p.1.


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